Mária Lakatos

Taxation in General: Hungarian Tax System

IV. Chapter. Calculation of the personal income tax and contributions for earned income

In the previous chapter we have discussed the general principles of taxation, the general, 15 per cent rate of the personal income tax, and the term of social security contributions. Now we shall get acquainted with the practice of the calculation of the personal income tax and the contributions, as such calculations are made at the companies. The calculation of the personal income tax follows a very simple pattern, one, that must always be applied.

Revenue

(–) amounts received that do not classify as receipts (e.g., amount of credit)

(–) costs that can be accounted for according to the act

(–) tax credits

Calculated basis of assessment

(–/+) other adjusting items (e.g., reimbursement of former tax credits, tax base deductions)

Tax base

Calculated tax

(–) tax deductions/allowances

(–) tax advances paid

Tax to pay/reclaim

The above basic calculation already shows that receipts are not equal to income, the tax base including costs and other tax base deductions and the calculated tax with the tax deductions and advances that is finally to be paid or reclaimed.

Definition

Revenue(receipts): assets acquired by a natural person from others under whatever title and in any form – in cash ((including by operation of the law: cash substitutes) or in kind.

Income: Income is the total of assets acquired by a natural person from another person, or the part thereof reduced by recognized expenses, expenses recognized without evidence, or lump sum costs or the ratio of the receipts as defined by law.

Recognized expenses: Recognized expenses are expenditure that have arisen in direct relation to the activity aiming at realizing revenues, solely and exclusively for obtaining the revenues and pursuing the activity. In addition to the above, recognized expenses must actually be paid during the tax year, and duly certified [11].

The above definitions demonstrate that such terms as „revenue”, „income”, and „expenses” have significantly different interpretation in the context of the Personal Income Tax Act (and also: other tax acts) than in that of the Act on Accounting. Revenues/ receipts represent an extended category, for they cover any receipt or other assets obtained under whatever title, while expenses were given a more restrictive interpretation, as not expenditure in general, but only expenses recognized by the tax Act are meant thereby.

(The various state or EU subsidies that can be applied for or won by sole proprietorships are very interesting in this context as they are not treated as revenue and do not increase the basis of assessment!)

The basis of assessment is thus calculated according to the above scheme. For the time being the personal income tax rate is 15%, which means that the calculated tax shall be calculated using this rate.

From among the various types of income falling under the scope of personal income tax, in this chapter we shall discuss the calculation of the tax liabilities and contributions payable to the social security on income that originates from non-self-employed activities.

For the time being, these rules apply to 4.5 million employees, which means that from the point of view of tax receipts from the personal income tax, the layer of employees is the one that bears the greatest burden [11].

Income from non-self-employed activities shall arise when the natural person carries out these activities for another person, commissioned thereby and using the latter’s assets and tools. Although the definition is not the accurate definition of employment, still this is what describes it the best. When establishing employment, from the date of the relevant contract of work coming into effect both parties shall incur tax and social security liabilities.

The tax and social security liabilities of the employer shall be as follows:

The employer shall calculate the gross wage summarizing the monthly salary and other wage-like payments, fringe benefits, bonuses, and allowances. For 13 % of this, social contribution tax shall be paid (this is not a contribution, but a tax!). The rate of SZOCHO (social contribution) is 13 %. For a gross wage of HUF 200,000 the expenses of the employer shall be as follows:

Example 1

Gross wage		200 ,000
Social contribution	200,000 × 0.13	26 ,000
Total expenses:		226 ,000

This amount is the so-called gross gross, which means that the HUF 200,000 monthly earning (gross salary) (NOT income and NOT receipts) costs in aggregate so much to the employer. The gross gross contains the gross amount, which is the sum before the taxes and contributions to be paid by the employee are deducted and as well as the burdens payable by the employer for the employee.

This means, that as a result of the employment relationship the employer but also the employee shall have tax and contribution payment liability. In the majority of the cases, the company, as payer, deducts all the contributions and taxes and pays them on its and also on the employee’s behalf.

Definition

Earning: the aggregate amount of income originating from the employment relationship Part of the average receipts at any point of time are: the base salary in the month of payment, the wage supplements (including miners’ loyalty reward and the Széchenyi Professorial Scholarship), the supplementary wage, bonuses and gratuities and the 13th month’s extra salary and any additional months paid.

The gross gross wages are shown among the expenditure of companies, but the various items, such as wages costs, wage contributions, other wage-type benefits are recorded separately, still, these together make up the labour costs.

On the pay list, i.e., the receipt issued upon payment of the salary the gross wage is shown and, naturally, the receipt also contains the additional deduction: deductions that are already to the account of and, thus, payable by the employee but are deducted (withheld) by the payer (i.e., the employer) from the gross wage and then transferred until the 12th day of each month to the state budget by the latter.

2. Table. Public burdens payable by the employee for a gross wage of HUF 200,000

Personal income tax (SZJA. by the Hungarian abbreviation	15 %	30 ,000
Pension contribution payable by the employee	10 %	20 ,000
Health care contribution payable by the employee	4 + 3 %	14 ,000
Contribution to the labour market fund	1.5 %	3 ,000
Total deductions:	33.5 %	67 ,000
Net wage	66.5 %	133 ,000
Net wage in percentage of the gross wage	133 ,000/200,000×100	66.5 %
Net wage in percentage of the total costs	133 ,000/226,000×100	58.84 %

Source: by own calculation

The simple scheme hereunder shows, that instead of the central budget actually, it is the payer who has to collect the deductions the employee is subject to and, simultaneously, to satisfy also the tax and contribution payment obligations the payer is to meet. This duality is crucial from the point of view of modern taxation, according to which income has to be taxed at source, and the amounts due to the budget have to be deducted immediately upon payment of the income.

Taxation in General: Hungarian Tax System

Tartalomjegyzék

Kiadó: Akadémiai Kiadó

Online megjelenés éve: 2022

ISBN: 978 963 664 137 5

Taxation is a scheme for the state to provide revenue. The so collected money could then cover the public spending of the government. These are the so-called allocative and redistributive functions of the state budget. Although, taxation theory discusses the various tax types and analyses the various taxation tools very extensively, there is no absolute answer to the question, when and what type of taxation system would be optimal. Thus this introductory book on taxation deals with the three basic types of taxes - the income tax, the VAT and the corporation tax - in a very pragmatic way. There are legal texts and cases from both the international and also from the relevant Hungarian practice.

This book is recommended not only for students of economics but also for law students and practitioners beside anyone who is interested in the basic regulations of taxation.

Hivatkozás: https://mersz.hu/lakatos-taxation-in-general-hungarian-tax-system//

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